The primary objective of tax planning is to minimize your taxes while maximizing the returns on your investments. As per the Income Tax (IT) Act, taxes are levied at different rates based on your income. However, the act also provides certain ways in which you may minimize your liability by investing in tax-saving instruments.

In India, tax planning is often considered as a last-minute effort to reduce your liability. Moreover, some people also think that such planning is beneficial only when they are older. However, the best time to start planning your taxes is once you begin earning an income.

Section 80C of the IT Act provides several investment avenues to reduce your tax liability. These include insurance, Equity-Linked Savings Schemes (ELSS), fixed deposits, and others. There are health insurance tax benefits that are also available.

When you begin early, you are able to earn many benefits in the long-term. This planning will especially be beneficial later in your life when you commence retirement planning.

Here is how you may plan your taxes at various stages in life:

  1. When you attain 18 years of age
  • Document your various incomes
  • Any gifts in cash must be deposited in your bank account
  • Ensure separate files are maintained to prevent clubbing of income of various family members
  1. When you start earning an income
  • Maintain records of your deposits and withdrawals
  • You must save as much as possible because financial commitments at this stage are not very high
  • Invest in Public Provident Fund (PPF), which is a tax-saving instrument with a 15-year lock-in period
  • Do not spend on luxuries
  • Purchase insurance plans to avail of life and health insurance tax exemptions
  1. When you get married
  • Do not give gifts to your spouse as it may be clubbed with your income
  • If your spouse is not working, you must not withdraw money for regular expenses from her account, which must be invested in tax-saving instruments
  • Save for your home, if you do not have one
  • If you live in a joint family, open a Hindu Undivided Family (HUF) account with a separate file
  • Consider family insurance and use an online family health insurance premium calculator to know the approximate expense
  1. Ten years post your marriage
  • Invest on behalf of your kids
  • Even if there is some paucity of funds, consider a long-term insurance policy to plan for their education and marriage
  • Maturity amounts on earlier investments must be invested in long-term risk-free instruments
  1. When your kids are married
  • Total income is distributed among you, your spouse, children, and their spouses
  • Make your will and plan your taxes in a way to maximize savings for the family
  1. When you are a senior
  • Have joint accounts and invest your maturity proceeds
  • Invest in safe instruments in joint names

How to plan your taxes?

When you are in your 20s with lesser financial responsibilities, you may invest in equity-oriented instruments. This provides you with the opportunity to earn higher returns combined with the compounding effect. As your responsibilities increase, products like in life insurance, home loans, Employee Provident Fund (EPF), and tuition fees provide tax benefits.

To maximize tax-planning benefits, it is important to know about Section 80C of the IT Act. Several investment products and expenses under this section are beneficial in reducing your tax liability.

You are able to save up to INR 1.5 lakh per annum through various investments. In addition to investments, you are able to reduce taxes through expenses, such as children’s tuition fees. Your contribution to EPF is also eligible for tax benefits. Life insurance not only provides financial protection but the premium paid is also eligible for tax deductions. Additionally, section 80D medical insurance tax benefit is available on an individual as well as family floater health plans.

Tax planning must be modified at various stages of your life. You must review your investments and modify your planning as per your personal goals and requirements.

By Chakraborty

Dr Chakrabarty is the Chief Innovation Officer of IntuiComp TeraScience. Earlier she was Assistant Professor of Delhi University, a QS ranked university in India. Before that she has held research positions in IIT Mumbai, IIT Chennai and IISc Bangalore. She holds 2 patents and over 20 research publications in her name which are highly cited. Her area of research is in smart technologies, integrated devices and communications. She also has a penchant for blogging and is an editor of Business Fundas.